Does 'buy American' send the wrong message?

An economic stimulus package clause raises concerns of repercussions by US trading partners.

ByDavid R. FrancisFebruary 9, 2009

Many officials in the United States and abroad fear the global economic slump will revive protectionism. The immediate cause for concern is a "Buy American" clause in the $900 billion economic stimulus package now moving through Congress.

A probable casualty of the recession already is the Doha Development Round. The goal of these worldwide negotiations, started in 2001, is to further reduce barriers to international trade and commerce.

But this round just went into "a deep freeze," says Harald Malmgren, a Washington economic consultant who helped negotiate the successful 1964-67 Kennedy Round of trade talks. It's "virtually impossible" to liberalize trade in a synchronized world recession, he adds. World trade and shipping are now declining.

In an attempt to revive the stalled Doha talks, key trade ministers met last month on the sidelines of the World Economic Forum in Davos, Switzerland. But the private session "ended in acrimony," says Mr. Malmgren.

Afterward, Pascal Lamy, director-general of the World Trade Organization, issued a statement expressing hope that an April 2 meeting in London of the Group of 20, which includes the world's biggest trading nations, will "provide further impetus" to the negotiations. Malmgren suspects the talks have been frozen so often they have "freezer burn," and will be just dumped in the garbage.

Whatever the case, Americans are still buying substantially more foreign goods and services than they are producing and selling abroad. The US current account, the broadest measure of international commerce, was about $700 billion in the red last year. This amounts to almost $2 billion a day. That deficit is "clearly unsustainable," says Charles McMillion, a Washington economic consultant. He calls for direct action to reduce imports and describes the Buy American clause in the stimulus package as "absolutely essential" to creating more jobs at home.

In contrast, a bipartisan report by 22 of the nation's top trade experts was distributed to key members of Congress last week in an attempt to persuade them that protectionism would damage US interests and could stir up countermeasures by US trading partners.

Last Tuesday, a spokesman for the European Community called the Buy American provision the "worst possible signal" that President Obama's new administration could send out. Canada's ambassador to Washington similarly warned that passage of the clause could prompt global repercussions. The Canadian economy is highly dependent on trade with the far larger US economy for its prosperity.

Mr. Schott wrote most of the trade section in the 12-page Trade Policy Study Group report intended to help Mr. Obama understand world trade issues and proposed solutions. During the election campaign, Obama spoke of a need for renegotiating the North American Free Trade Agreement and talked much of "fair trade." Such statements prompted concerns he might be inclined toward more protectionism.

Yet his appointment of key economic officials with strong free trade credentials, some from the Clinton administration, prompted consternation among some advocates of a tougher American trade policy.

Both Mr. McMillion and Schott reckon the US will have to be sterner with China. The charge is that China manipulates the value of its currency, the yuan, in order to have a price advantage in selling goods to the American market. The trade group report states the yuan is "substantially undervalued."

But Mr. Malmgren maintains that the Chinese economy is no longer growing. Its exports and imports are collapsing in reaction to the world recession. China's top economic policymakers, his high sources tell him, are divided on what to do to revive the nation's economy in addition to a $600 billion stimulus package.

"The China threat is over," he says.

Malmgren's main concern is that China will use a large chunk of its perhaps $2 trillion in US Treasuries to finance another domestic rescue package, putting upward pressure on US interest rates.

Meanwhile, a huge trade deficit continues. From 2001 to 2008, the European Union, Japan, and Canada sold the US $1.9 trillion more than they bought. China's surplus has been about as big.

In order for the US trade deficit to shrink to a more manageable level, its trading partners will have to make concessions in future trade deals, says McMillion.